Dollarization - the holding by residents of a substantial portion of their assets in foreign-currency-denominated assets- is a common feature of developing and transition economies, and therefore typical of many countries with IMF - supported adjustment programs. This paper analyzes policy issues that arise-and various monetary strategies that may be pursued- when the monetary sector is dollarized, and it considers the implications that dollarization has for the design of IMF programs.

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

– between years or months (for example, 1994–95 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (for example, 1994/95) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Abbreviations

CBD

Cross-border deposits

CMIR

Currency and Monetary Instruments Reports

DCC

Dollar currency in circulation

FCD

Foreign currency deposits

FCL

Foreign currency loans

FCR

Foreign currency reserves (required for FCD)

LCD

Local currency deposits

NDA

Net domestic assets

NFA

Net foreign assets

NIR

Net international reserves

RR

Reserve requirements

Preface

Dollarization, which is a common feature in many countries, particularly developing countries and countries in transition, has important economic implications. This Occasional Paper analyses the costs and benefits of dollarization and explores its prudential and monetary policy implications. In particular, the paper reviews dollarization trends; explores the various monetary and exchange rate policy strategies that may be pursued in the presence of dollarization; and examines the implications of dollarization for the conduct of monetary policy, the issue of prudential norms and regulations, and the design of IMF programs. The paper also considers the effectiveness and drawbacks of measures to limit dollarization.

The authors thank Guillermo Calvo and Peter Garber, who provided comments on early versions of the paper, as well as many colleagues at the IMF but especially Paul Masson, Ratna Sahay, and Tessa van der Willigen, and members of the Executive Board for valuable comments and a stimulating Board seminar discussion in January 1998.